Last reviewed: October 2026
An intrafamily loan becomes a taxable gift, in the IRS's eyes, when it lacks the features of a real loan: a written agreement, a repayment schedule, and interest at or above the Applicable Federal Rate. Without them, the IRS can treat the transfer as a gift, forgiving it later can count as a second gift, and below-market interest can create taxable income you never received. A one-page promissory note fixes most of it.
Key Takeaways
- An intrafamily loan needs a written note, repayment schedule, and interest at or above the IRS Applicable Federal Rate to count as a loan.
- Gifts above the 2026 annual exclusion of $19,000 per recipient require a gift tax return, even when no tax is due.
- Most families owe no federal gift tax because the 2026 lifetime exemption is $15 million, but reporting still applies.
- Maryland's $5 million estate tax exemption means an unpaid family loan can matter at death even when federal tax doesn't.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate estate, gift, and windfall planning since earning his CFP® certification in 2013, by using Chesapeake's signature process, the R.U.D.D.E.R. Method™. "Helping family with money is a good instinct," Jeff says. "Calling it a loan when everyone is treating it like a gift is where the trouble starts."
Why Does the IRS Treat an Informal Intrafamily Loan as a Gift?
Because the IRS looks at what a transaction is, not what you call it. A client came into a significant inheritance and almost immediately loaned her brother $60,000 to get his business through a rough patch. No paperwork, no interest, just a wire transfer and an understanding that he'd pay her back when things turned around. In the eyes of the IRS, that wasn't clearly a loan at all.
A real loan has a few basic ingredients:
- A written agreement that names the lender, borrower, and amount.
- A repayment schedule with dates both people can point to.
- Interest at or above the Applicable Federal Rate, the minimum rate the IRS publishes every month.
Skip those, especially the interest, and the IRS has grounds to recharacterize the transfer as a gift. On its Applicable Federal Rates page, the IRS states: "Each month, the IRS provides various prescribed rates for federal income tax purposes." Those rates are the floor a family loan is measured against, and they're often meaningfully lower than what a bank would charge.
Will I owe gift tax if my loan gets reclassified? Probably not tax, but likely paperwork. A gift above the annual exclusion has to be reported on a gift tax return (Form 709), and it uses up part of your lifetime exemption. Our guide to gift tax and annual exclusions covers how the exemption is tracked.
How Can One Family Loan Turn Into Two Taxable Events?
Forgiveness is where a single transfer quietly becomes two. In many families, repayment never quite materializes, and the lender eventually says "forget it." Forgiving the balance is generally treated as a separate gift at the time you forgive it. So one well-intentioned transfer can create a gift when the money moves (if it never qualified as a loan) and another when the debt is waived.
There's a second layer even well-informed clients miss. When a family loan charges less than the required minimum rate, the tax code can impute interest: it assumes interest was charged at the required rate whether or not any changed hands. That phantom interest can be taxable income to the lender and, in some cases, an additional gift to the borrower. A zero-interest loan can produce a tax bill for interest nobody paid. Small loans may fall under limited exceptions, which is a question for your CPA before the money moves.
"Jeff Judge has seen this play out with clients more than once: a family loan with no documentation becomes a source of confusion during tax season, and in the worst cases, a source of real conflict during a divorce or an estate settlement, when suddenly everyone has a different memory of whether that $60,000 was ever supposed to come back."
Where Do Undocumented Family Loans Go Wrong?
The pattern we see most often: someone receives a windfall, a sibling or adult child asks for help, and the money moves the same day, informally, because putting family through a "formal loan process" feels cold. Nobody wants to hand their brother a promissory note at Thanksgiving. We understand that completely. But the informality that feels warm in the moment creates the problem later.
Three situations make it worse:
- The lender dies before repayment. Without documents, the estate can't show whether the money is a debt owed back to the estate or a gift already made, and that ambiguity can change how assets divide among grieving siblings.
- Only one spouse knew. A husband who quietly lends his sister $40,000 has created an obligation, or a gift, that affects the whole household. When it doesn't come back on schedule, the conversation becomes about trust as much as money.
- A mortgage is involved. Parents helping with a first home often learn the lender needs to know, in writing, whether the money is a gift or a loan, because it affects the buyer's debt-to-income ratio. Families who haven't decided end up answering under deadline pressure at closing.
A $200 loan to help a niece with a car repair rarely needs a promissory note. A $60,000 loan to a sibling after an inheritance is a different category of decision, and that's why this comes up most right after a windfall, when both the impulse to help and the amounts are largest.
How Do You Structure an Intrafamily Loan Correctly?
Give it the same basic structure as any other loan, sized to the relationship:
| Element | Informal "loan" | Properly structured intrafamily loan |
|---|---|---|
| Documentation | Verbal understanding | Short signed promissory note |
| Interest | None | At or above the current Applicable Federal Rate for the term |
| Repayment | "When things turn around" | Written schedule with dates |
| Missed payment plan | Undiscussed | Agreed in advance: restructure, forgive, or treat as a gift |
| Estate plan | Not mentioned | Loan reflected in the will or trust |
Decide in advance what happens if a payment is missed. It's far easier to agree calmly, before money changes hands, than after a payment is three months late. For six-figure loans, we often bring in an estate planning attorney so the loan is accounted for correctly from the start, rather than left for an executor to untangle.
Revisit the loan when anything changes. The IRS publishes rates monthly, and a loan properly set up at origination doesn't need renegotiating just because rates moved. But if you extend, renew, or modify it, check whether the new terms still meet current requirements.
Should I just make a gift instead? Sometimes. If you'd genuinely be fine never seeing the money again, an outright gift, planned around the annual exclusion, can be cleaner than a loan nobody intends to enforce. The problem isn't gifting to family. It's calling something a loan when everyone treats it like a gift.
The client from the start of this article fixed her situation in time. We drafted a short promissory note with her brother, set the rate at the current Applicable Federal Rate, and put a signed repayment schedule in writing. Nothing about the relationship changed, except that both siblings now share the same understanding of what the money is.
How Does Maryland Estate Tax Affect an Unpaid Family Loan?
Maryland adds a layer national articles skip. A documented loan that's still outstanding at your death is an asset of your estate, and Maryland's estate tax exemption is $5 million, far below the federal $15 million. For a Harford County family with a paid-off home, retirement accounts, life insurance, and an unpaid note from a child, that receivable can push the estate closer to the state threshold. Our overview of Maryland's estate tax in 2026 explains how the state calculation works.
Forgiving a loan in your will is also, in effect, leaving that amount to the borrower. Maryland's inheritance tax generally runs 10% for collateral heirs such as nieces, nephews, and friends, while children and siblings are exempt, so who borrowed the money matters.
For families in Forest Hill, Bel Air, Fallston, and across the Baltimore metro, we fold family loans into the estate conversation. The R.U.D.D.E.R. Method™ is Chesapeake Financial Planners' six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. Discuss and Decide is where the "loan or gift" question gets settled before the wire goes out. For the federal side, see our guide on why estate planning still matters under the $15 million exemption.
Frequently Asked Questions
What makes an intrafamily loan legitimate to the IRS?
An intrafamily loan looks legitimate to the IRS when it has a signed written agreement, a fixed repayment schedule, and interest charged at or above the Applicable Federal Rate for the loan's term. Actual repayments that follow the schedule strengthen the case. Without those features, the IRS can treat the transfer as a gift.
What is the Applicable Federal Rate for a family loan?
The Applicable Federal Rate is the minimum interest rate the IRS publishes every month for short-term, mid-term, and long-term loans. A family loan charging at least the AFR for its term generally avoids imputed interest. Check the IRS's current monthly ruling when you sign, because the rate in effect that month applies.
Is forgiving a family loan a gift?
Yes. Forgiving all or part of a family loan is generally treated as a gift of the forgiven amount at the time you forgive it. If the forgiven amount exceeds the $19,000 annual exclusion for 2026, you'd typically file a gift tax return, even though the lifetime exemption usually means no tax is owed.
Do I need a lawyer for a loan to a family member?
For modest amounts, a simple promissory note with an amount, schedule, and AFR-based rate is often enough. For six-figure loans, loans secured by real estate, or loans that may still be outstanding when you die, bring in an estate planning attorney so the note and your estate plan work together.
How does a family loan affect a Maryland estate?
An unpaid family loan is an asset of a Maryland estate, so it counts toward the state's $5 million estate tax exemption. If your will forgives the loan, the borrower effectively inherits that amount, and collateral heirs such as nieces and nephews can owe Maryland's 10% inheritance tax on it.
Should I lend or gift money to family after an inheritance?
Lend when you expect repayment and are willing to document and enforce it. Gift when you'd be fine never seeing the money again. Jeff Judge's test is simple: pick the label that matches how everyone will actually behave, then put that choice in writing so memories can't drift later.
Ready to Set Up a Family Loan the Right Way?
An intrafamily loan can be a generous, workable way to help family, as long as it's built before the money moves. Ready to put a plan around yours? Jeff Judge and the Chesapeake Financial Planners team serve families and business owners across Harford County and the Baltimore metro. Schedule a free fit call.
A version of this article was originally published on Chesapeake Financial Planners' LinkedIn.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
This information is not intended to be a substitute for specific individualized tax, investment or legal advice. We suggest that you discuss your specific situation with a qualified tax, legal or financial advisor.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
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